The effect of mergers and acquisitions on the financial performance of oil firms in Kenya

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A Merger refers to the combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger. An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. The study set out to find the effects of mergers and acquisition on financial performance of oil industry in Kenya. The objective of this research project was to establish the effect of mergers and acquisitions on the financial performance of oil firms in Kenya. This was by conducting an industry analysis of the oil sector in Kenya. The study was limited to a sample of companies in the Kenya market that merged/acquired between the years 2000-2014. Data were collected from the Annual Statement of Accounts and Financial Reports of the firms. Regression analysis was conducted to establish the relationship between financial performance and the independent variables that is the financial leverage, liquidity, capital adequacy, size of the merged/acquired oil companies in Kenya. Comparisons are made between the mean of 5-years pre-merger/acquisition and 5-years post-merger/acquisition financial ratios, while the year of merging/acquisition is exempted. The analysis and results show that petroleum firms performed poorly in the post-merger/acquisition era as compared to the pre-merger/acquisition era. The merger/ acquisition have a negative impact on the financial performance of the oil companies though this is not statistically significant at 5% level. The study therefore concludes that mergers and acquisitions do not have a statistically significant relationship with ROA. The study also found that financial leverage positively affects ROA of firms that merged however effect is not statistically. Liquidity positively affects ROA of the firms, though the effect is not significant. Both Size of the firms and capital adequacy negatively impacts on ROA and the effect is also not statistically significant. The study recommends that management should come up with a sound strategy towards asset and liability management so as to avert the problem of mismatching investments and also the quality of assets should be enhanced. Management should put into consideration the degree of transferability and marketability of assets invested in so that these assets can provide liquidity to the firm with ease.